Madigan v. Telemarketing Associates, Inc. (2003)

n Madigan v. Telemarketing Associates, Inc., 538 U.S. 600 (2003), the Supreme Court held that the First Amendment right to free speech allows nonprofit organizations and telemarketers to engage in charitable solicitation, but it does not shield against fraudulent use of subsequent donations.

Telemarketing Associates, Inc. was a for-profit company that provided fundraising services for nonprofit charities, including a veterans group called VietNow National Headquarters. The attorney general of Illinois, James Ryan, brought legal action against Telemarketing Associates, Inc. and another company for fraudulently representing that a significant amount of the money raised would go for charitable purposes, although the contract between VietNow and the company specified that the charity would keep only 15 percent of the funds raised. Telemarketing Associates, Inc. argued that the suit should be dismissed because several previous Supreme Court decisions held that nonprofit fundraising was protected speech under the First Amendment. The state trial court granted the motion to dismiss, and that ruling was affirmed by both the Illinois appellate and supreme courts.

On appeal to the U.S. Supreme Court, Lisa Madigan had replaced Ryan as state attorney general, leading to the change in the name of the Court’s decision. Writing the opinion for the Court, which unanimously voted to reverse the decisions of the Illinois courts, Justice Ruth Bader Ginsburg said, “States may maintain fraud actions when non-profits directly or through a fundraiser make false or misleading representations designed to deceive donors about how their donations will be used.” The Court distinguished between a fundraiser’s failure to disclose information and a failure to disclose combined with “intentionally misleading statements designed to deceive.” The decision represents a major setback to telemarketing companies relying on First Amendment protections to repel governmental attempts to regulate their fundraising activities.

Previously the Supreme Court had ruled against state laws that limited the percentage of donations that could be kept by for-profit companies in such cases as Schaumburg v. Citizens for a Better Environment (1980), Secretary of State of Maryland v. Joseph H. Munson Co., Inc. (1984), and Riley v. National Federation of the Blind (1988). In each case the Court found government restrictions on the percentage of funds kept by solicitors to be an unconstitutional violation of free speech. The Court held that such restrictions did not adequately serve their intended purpose and were overly intrusive. However, the Court made clear that the previous rulings did not provide protections for fraudulent activities, and the First Amendment does not protect such speech. See the Donaldson v. Read Magazine (1948) and Schneider v. State (1939) cases and theVarat article (2006).

In Madigan, deliberate misrepresentation was the central issue. The government argued that the companies’ cut of 85 percent amounted to fraud because they did not disclose their substantial take, yet made clear statements indicating that most of the funds would be spent for charitable purposes. Justice Antonin Scalia’s concise concurrence noted that the scope of the company’s deception was crucial for distinguishing between permissible omissions in charitable solicitation versus impermissible fraud. The framework identified by Scalia still provides latitude for companies to engage in questionable solicitation, and the ruling has implications for other forms of fraudulent commercial speech. Overall, the importance of this decision is that nonprofits are no longer shielded by the First Amendment from fraud claims when making solicitations for donations or contributions.